DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access 21 January 2014 Europe/United Kingdom Equity Research Oil & Gas Exploration & Production (Integrated Oil & Gas/E&P/European Refiners (Europe)) Tullow Oil (TLW.L) DECREASE TARGET PRICE 2014: a better year with the drill bit? Maintain Neutral / Reduce TP to 1025p (from 1097p): the exploration charge in 2013 highlights the difficult year TLW has had in 2013 (offshore exploration), while the 2014 production guidance was disappointing. However, the issues at Jubilee are not fundamental in nature, while elsewhere we are seeing (good) progress in Kenya and even in Uganda. Also, the 2014 drilling campaign could be interesting. Bottom line, however, we lower our TP to 1025p (from 1097p) due to (a) the exploitation of reserves through production, (b) increase in net debt, and (c) recent unsuccessful wells, part of which is offset by the increase in NAV of the development assets being a year closer to first oil. Fundamentally, we remain Neutral with the stock trading above our core NAV of ~750p. Drilling in 2014: In the onshore, TLW is focusing on the Tertiary rift basins in East Africa. It will continue exploration/appraisal in now 7 of the 10 frontier basins in Kenya/Ethiopia over the coming 18 months. 2014 is an important year, also in the context of potentially moving forward the South Lokichar resources into development in 2015/16. In the offshore, the drilling looks to be less scattered (Mauritania, Gabon, Guinea and Norway) targeting different play types. Over the past 4-5 years, TLW has been working on its geological model for Mauritania. It has embarked on a three-well programme, and we look to each one of the three with the first well update likely in late Jan/early Feb. Monetisation: efforts here are key to reassuring the market on its funding capability and asset quality. The update on TEN (Ghana) will be important, so is progress on its North Sea assets. Otherwise, we think TLW is moving in the right direction to give itself further resources to (partly) monetise, such as the potential development of the South Lokichar development once fully appraised, and potentially another stake in Uganda as this moves towards FID in 2015. Valuation: our TP is set close to our revised risked NAV of 1024p/share. Our EPS changes are reflective of (a) the new production guidance and (b) our recent macro changes, where we have lowered our oil price estimates. Share price performance 697 1197 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Price Price relative The price relative chart measures performance against the FTSE ALL SHARE INDEX which closed at 3657.12 on 17/01/14 On 17/01/14 the spot exchange rate was £.82/Eu 1. - Eu .74/US$1 Performance Over 1M 3M 12M Absolute (%) 8.2 -7.5 -22.2 Relative (%) 4.7 -9.9 -35.4 Financial and valuation metrics Year 12/12A 12/13E 12/14E 12/15E Revenue (US$ m) 2,344 2,603 2,486 2,331 EBIDAX (US$ m) 703.9 1,150.5 754.2 703.5 Pre-tax Profit Adjusted (US$ m) 413.4 267.2 760.9 584.5 CS adj. EPS (US$) 0.68 0.16 0.35 0.23 Prev. EPS (US$) — 0.72 0.73 0.47 ROGIC (%) -0.62 3.44 5.45 3.73 P/E (adj., x) 21.75 93.92 43.05 64.92 P/E rel. (%) 168.9 688.0 346.5 570.0 EV/EBIDAX (x) 20.4 13.4 21.5 24.9 Dividend (12/13E, USc) — Dividend yield (%) — Net debt (12/13E, US$ m) 1,900.3 GIC (12/13E, US$) 7,272.0 BV/share (12/13E, US$) 5.8 Current WACC — EV/GIC (x) 2.3 Number of shares (m) 909.97 Free float (%) 99.0 Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates. Rating NEUTRAL* Price (17 Jan 14, p) 906.50 Target price (p) (from 1,097.00) 1,025.00¹ Market cap. (£ m) 8,248.90 Enterprise value (US$ m) 15,440.03 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Research Analysts Thomas Adolff 44 20 7888 9114 [email protected]Charlotte Elliott 44 20 7888 9484 [email protected]Specialist Sales: Jason Turner 44 20 7888 1395 [email protected]
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
21 January 2014
Europe/United Kingdom
Equity Research
Oil & Gas Exploration & Production (Integrated Oil & Gas/E&P/European
Refiners (Europe))
Tullow Oil (TLW.L) DECREASE TARGET PRICE
2014: a better year with the drill bit?
Maintain Neutral / Reduce TP to 1025p (from 1097p): the exploration charge in 2013 highlights the difficult year TLW has had in 2013 (offshore exploration), while the 2014 production guidance was disappointing. However, the issues at Jubilee are not fundamental in nature, while elsewhere we are seeing (good) progress in Kenya and even in Uganda. Also, the 2014 drilling campaign could be interesting. Bottom line, however, we lower our TP to 1025p (from 1097p) due to (a) the exploitation of reserves through production, (b) increase in net debt, and (c) recent unsuccessful wells, part of which is offset by the increase in NAV of the development assets being a year closer to first oil. Fundamentally, we remain Neutral with the stock trading above our core NAV of ~750p.
Drilling in 2014: In the onshore, TLW is focusing on the Tertiary rift basins in East Africa. It will continue exploration/appraisal in now 7 of the 10 frontier basins in Kenya/Ethiopia over the coming 18 months. 2014 is an important year, also in the context of potentially moving forward the South Lokichar resources into development in 2015/16. In the offshore, the drilling looks to be less scattered (Mauritania, Gabon, Guinea and Norway) targeting different play types. Over the past 4-5 years, TLW has been working on its geological model for Mauritania. It has embarked on a three-well programme, and we look to each one of the three with the first well update likely in late Jan/early Feb.
Monetisation: efforts here are key to reassuring the market on its funding capability and asset quality. The update on TEN (Ghana) will be important, so is progress on its North Sea assets. Otherwise, we think TLW is moving in the right direction to give itself further resources to (partly) monetise, such as the potential development of the South Lokichar development once fully appraised, and potentially another stake in Uganda as this moves towards FID in 2015.
Valuation: our TP is set close to our revised risked NAV of 1024p/share. Our EPS changes are reflective of (a) the new production guidance and (b) our recent macro changes, where we have lowered our oil price estimates.
Share price performance
697
1197
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13
Price Price relative
The price relative chart measures performance against the
FTSE ALL SHARE INDEX which closed at 3657.12 on
17/01/14
On 17/01/14 the spot exchange rate was £.82/Eu 1. -
Income statement (US$ m) 12/12A 12/13E 12/14E 12/15E
EBITDAX 1,154 1,231 1,159 1,037 Depr & amort (excl. goodwill) — — — — EBITDA 483 331 909 787 Exploration expense 671 900 250 250 Goodwill impairment — — — — Other adjustments to EBIT — — — — EBIT 483 331 909 787 E&P 1,185 331 909 787 R&M — — — — Chemicals — — — — Gas & Power — — — — Others — — — — Net interest income (exp) (49) (76) (148) (203) Net non operating inc (exp) (20) 12 — — Share of associates/JVs' equity — — — — Exceptionals — — — — Profit before tax 413 267 761 584 Taxes 450 81 404 334 Profit after tax (36) 186 357 251 Extraordinary gain/(loss) — — — — Non-controlling interest (minority) 42 42 42 42 Preferred dividends — — — — Other analyst adjustments 702 — — — Adjusted net income 624 144 314 208 Reported net income 624 144 314 208
Cash flow (US$ m) 12/12A 12/13E 12/14E 12/15E
EBIT (CS) 483 331 909 787 Non Cash Items 562 687 720 710 Change in working capital 8 (420) — — Other operating cash flow 468 883 (8) 63 Cash flow from operations 1,520 1,481 1,621 1,560 CAPEX (1,849) (1,800) (2,200) (2,500) Disposals of PPE — — — — Free cash flow to the firm (329) (319) (579) (940) Acquisitions — (393) — — Divestments 2,570 — 42 — Exploration investment — — — — Other investment/(outflows) 1 12 11 11 Cash flow from investment 722 (2,181) (2,147) (2,489) Net share issue/(repurchase) (1) 3 — — Dividends paid (173) (163) (109) (109) Change in debt (1,922) 900 — — Other financing cash in/(outflows) (103) (111) (159) (214) Cash flow from financing activities (2,198) 628 (268) (323) Effect of exchange rates (20) 3 — — Movements in cash/equivalents 44 (72) (794) (1,251) Net change in cash 23 (69) (794) (1,251)
Balance sheet (US$ m) 12/12A 12/13E 12/14E 12/15E
Assets Goodwill & similar — — — — PPE&E & intangibles 4,408 5,113 6,593 8,383 Associates & JV — — — — Inventory 164 162 162 162 Receivables 239 309 309 309 Other current assets 892 1,600 1,483 1,366 Other non-current assets 3,680 4,270 3,978 3,728 Total assets 9,382 11,454 12,525 13,948 Liabilities & equity Payables 848 1,017 1,017 1,017 Net cash/(debt) 843 1,900 2,694 3,946 Other current liabilities 381 294 294 294 Total current liabilities 1,229 1,311 1,311 1,311 Provisions (incl Pensions) — — — — Other non-current liabilities 1,988 2,871 2,871 2,871 Total liabilities 4,060 6,082 6,876 8,128 Ordinary equity 5,229 5,258 5,535 5,707 Minority interest 92 114 114 114 Total equity 5,322 5,372 5,649 5,820
Key earnings drivers 12/12A 12/13E 12/14E 12/15E
Brent (/bbl) 111.9 107.7 101.8 96.2 UK Spot gas (p/th) 57.2 65.4 67.0 66.2 Total WI production (kbd) 84.3 82.2 81.1 — Total Entitlement production (kbd)
69.3 74.4 72.6 71.1 — — — —
Per share data 12/12A 12/13E 12/14E 12/15E
No. of shares (EOP) 912.45 908.80 908.80 908.80 CS adj. EPS (US$) 0.68 0.16 0.35 0.23 Prev. EPS (US$) — 0.72 0.73 0.47 DPS (12/13E, US$) — — — — Book value per share (US$)
5.8 5.8 6.1 6.3 Operating cash flow per share (US$)
The analysts identified in this report each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Africa Oil Corp (AOI.V)
AOI.V Closing Price Target Price
Date (C$) (C$) Rating
17-Dec-13 8.52 12.00 O *
15-Jan-14 9.83 13.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
3-Year Price and Rating History for CNOOC Ltd (0883.HK)
0883.HK Closing Price Target Price
Date (HK$) (HK$) Rating
18-Mar-11 17.24 15.90 U
03-Oct-11 12.16 20.28 O
04-Oct-11 11.34 *
19-Oct-11 13.18 16.60 O
26-Oct-11 14.54 16.15
07-Nov-11 14.92 15.95
08-Jan-12 15.08 17.60
23-Feb-12 17.38 17.60 N
13-Apr-12 15.82 18.30 O
11-Jul-12 15.38 17.80
15-Oct-12 15.78 18.60
05-Nov-12 16.28 20.00
04-Apr-13 14.94 20.20
15-Aug-13 14.68 20.00 *
20-Aug-13 14.82 21.00
06-Jan-14 13.84 20.00
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
O U T PERFO RM
N EU T RA L
21 January 2014
Tullow Oil (TLW.L) 18
3-Year Price and Rating History for Subsea 7 S.A. (SUBC.OL)
SUBC.OL Closing Price Target Price
Date (Nkr) (Nkr) Rating
08-May-12 130.05 144.39 U *
10-May-12 132.36 *
14-May-12 124.18 139.00 U
05-Jul-12 121.70 150.00
10-Aug-12 133.30 135.00
20-Nov-12 127.60 135.00 N
28-Jan-13 139.10 140.00
13-Feb-13 133.40 NR
30-Apr-13 124.20 140.00 N *
28-Jun-13 106.50 124.00
15-Aug-13 123.10 133.00
* Asterisk signifies initiation or assumption of coverage.
U N D ERPERFO RM
N EU T RA L
N O T RA T ED
3-Year Price and Rating History for Technip (TECF.PA)
TECF.PA Closing Price Target Price
Date (€) (€) Rating
24-Feb-11 68.71 69.00 N
17-Nov-11 66.13 *
09-Jan-12 71.43 NR
08-May-12 77.52 90.00 N *
31-Aug-12 83.74 90.00 U
13-Feb-13 78.89 NR
30-Apr-13 81.50 100.00 O *
31-Oct-13 77.15 85.00 N
18-Dec-13 62.80 75.00
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
N O T RA T ED
U N D ERPERFO RM
O U T PERFO RM
21 January 2014
Tullow Oil (TLW.L) 19
3-Year Price and Rating History for Tullow Oil (TLW.L)
TLW.L Closing Price Target Price
Date (p) (p) Rating
28-Apr-11 1433.00 1527.00 O
06-Sep-11 1086.00 1437.00
12-Sep-11 1397.00 1804.00
09-Nov-11 1360.00 1776.00 *
14-Nov-11 1347.00 *
15-Nov-11 1362.00 *
19-Jan-12 1383.00 1733.00 O
27-Mar-12 1562.00 1800.00 *
17-Apr-12 1483.00 1853.00
04-May-12 1469.00 1818.00
08-May-12 1517.00 1841.00
07-Jun-12 1468.00 1856.00
05-Jul-12 1476.00 1841.00
16-Jul-12 1386.00 1796.00
18-Jul-12 1428.00 1803.00
26-Jul-12 1310.00 1730.00
24-Aug-12 1370.00 1650.00
04-Dec-12 1292.00 1550.00
12-Dec-12 1182.00 1480.00 N
11-Jan-13 1186.00 1450.00
13-Feb-13 1260.00 1350.00
23-Apr-13 1037.00 1289.00
30-May-13 1043.00 1270.00
23-Jul-13 1041.00 1240.00
01-Aug-13 1066.00 1150.00
09-Sep-13 1059.00 1155.00
26-Sep-13 1061.00 1161.00
10-Dec-13 853.50 1097.00
* Asterisk signifies initiation or assumption of coverage.
O U T PERFO RM
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
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Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
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*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
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21 January 2014
Tullow Oil (TLW.L) 20
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
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Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 43% (53% banking clients)
Neutral/Hold* 41% (49% banking clients)
Underperform/Sell* 14% (43% banking clients)
Restricted 2%
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Price Target: (12 months) for Tullow Oil (TLW.L)
Method: We use a risked NAV framework to value our companies and state this clearly in our model summaries. This comprises Producing (DCFs of producing assets, discounted to 01 Jan 2013 using discount rates of 10-14% and long term Brent oil price of US$90/bbl); Development (same as Producing but with an additional risk factor to incorporate the possibility of delays / cost over-runs); Contingent and Exploration (resource potential multiplied by an NPV/boe from analogue fields weighted by a risk factor and further discounted depending on estimated time to development); and Financing (net debt position as at end-2012E). To reach our year-end target prices we apply a discount or premium to reflect our view of management track record, near-term option value (eg. from drilling newsflow or M&A potential), risks to financing, political risk profiles, exposure to project execution risk (especially for fields due to come onstream). We set our target price in line with our risked NAV of 1,025p/sh.
Risk: General risks include a decrease in oil/gas prices, delays in production start-up, currency fluctuations, political risk, changes to fiscal regimes, poor production rates from producing fields, exploration drilling failures, financing risk.
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See the Companies Mentioned section for full company names
The subject company (TLW.L, 0883.HK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
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The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (TLW.L, 0883.HK, SUBC.OL, TECF.PA) within the past 12 months
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21 January 2014
Tullow Oil (TLW.L) 21
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Credit Suisse Securities (Europe) Limited............................................................................................................. Thomas Adolff ; Charlotte Elliott
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21 January 2014
Tullow Oil (TLW.L) 22
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2014 01 21 Tullow - 2014 - a better year with the drill bit.doc